Demand for Philly warehouse space prompts developers to start building without tenants in hand

NorthPoint Development of Missouri plans to spend $57 million to build 600,000 square feet of high-end warehouse space at the Northeast Philadelphia site where the IRS once had its local administrative offices.

Who's going to use the space? They'll figure that part out later.

"We're building it without anybody in mind," said R.J. Agee, a project manager with the Kansas City-area developer. "It's an area we really like."

NorthPoint's Boulevard Logistics Center started work this month on its plan, which calls for renovating one of the two former IRS buildings at 11501-601 Roosevelt Blvd. to accommodate 122,000 square feet of warehouse space and a publicly accessible self-storage facility. The other building is to be demolished to make way for a new 465,000-square-foot warehouse.

NorthPoint aims to pitch its Philadelphia space to a comparable mix of tenants as it accommodates in similarly situated warehouses that it owns in St. Louis. Those users include Amazon.com Inc. and other e-commerce companies, a distributor of appliances for big box stores such as Lowes Cos. and Home Depot Inc., and a supplier of paper goods for area restaurants.

The project places NorthPoint among a vanguard of developers that are building or acquiring big, industrial properties in Philadelphia speculatively, without first lining up tenants for the space, a practice virtually unheard of in the city until recently. Developers are racing to ready space for warehouse users drawn to the city's central East Coast location, its dense population of consumers, and its big potential workforce.

"Companies are willing to make the speculative investment because, unless they have a building permitted already, and maybe even physically started, they don't get very far with their potential tenants," said Thomas Dalfo, an executive overseeing real estate activities at the Philadelphia Industrial Development Corp., which has been promoting warehouse growth as a way of boosting employment in the city.

Vacancy rates for industrial space in Philadelphia fell 4.3 percent between 2013 and 2017, according to a report in September by real estate services firm CBRE. The report presented the declines as an indication of increasing demand as more tenants flock to densely populated parts of the country to tap their deep pools of labor, estimating that a modern one million-square-foot e-commerce fulfillment center could require as many as 4,000 workers.

Philadelphia's drop in vacancies bested the 3 percent average of those in 15 markets classified by CBRE as regional logistics hubs, such as Boston, Phoenix and Detroit.

That tightening of supply has coincided with rent growth of almost 37 percent in Philadelphia, compared with an increase of about 19 percent across the 15 regional hubs, which CBRE defines as having smaller warehouse footprints than major hubs such as the I-78/I-81 corridor through the Lehigh Valley and Central Pennsylvania, and Southern California's Inland Empire.

Some of this new demand comes from companies fleeing East Coast locations where rents have skyrocketed, such as parts of New Jersey near New York, while others are drawn by the city's abundant supply of potential workers, said Richard Gorodesky, a senior vice president with commercial real estate firm Colliers International, which represented NorthPoint in its Roosevelt Boulevard acquisition.

E-commerce businesses such as Amazon.com Inc., meanwhile, need to be in the city so they can dependably fulfill the quick-delivery promises made to its dense populations of online shoppers, Gorodesky said.

"Part of it is the push from New York," he said. "Part of it is the desire to be near the labor and the population centers and the overall growth of the city itself."

The problem, Gorodesky said, is that Philadelphia has very little up-to-date warehouse inventory of sufficient size to accommodate this demand.

That's where the new projects come in.

NorthPoint bought the land for its Roosevelt Boulevard warehouse complex for $14.6 million in July from drug maker Lannett Co., which had acquired the buildings years earlier for a never-realized expansion plan there. The developer aims to have completed renovations at the first of its buildings there by the end of January and wants to have the second warehouse finished before the end of next year, Agee said.

NorthPoint also has another Northeast Philadelphia property under contract with plans for more warehouse space, said Agee, who declined to specify its location.

Meanwhile, in the nearby Byberry East Industrial Park, Chicago-based Ridge Development has broken ground on a 207,500-square-foot warehouse and distribution center on land at 3025 Meeting House Rd. that it purchased from the city for $2.18 million. Ridge, the industrial-property arm of Transwestern Development Co., aims to have its building available for occupancy by the end of September.

And across town, in Roxborough, Bryn Mawr-based Alliance Partners HSP bought Penn Beer Distributors Inc.'s longtime warehouse at 401-15 Domino Lane from the distributor for $6.87 million in September as a speculative acquisition. It is seeking a new tenant to use the 130,000-square-foot building once Penn Beer moves out early next year as part of its consolidation with Gretz Beer Co. in Hatfield, Matt Handel, a vice president with the development group, said in an email.

Patrick Green, an executive vice president with CBRE, said the spate of speculative activity is unlike anything he's seen since he started working on industrial deals four decades ago.

"People are speculating that if I buy this piece of dirt and build this building, they will come," he said.